Kilroy Realty Corporation Reports Fourth Quarter Financial Results

January 30, 2013 05:02 PM Eastern Standard Time

LOS ANGELES--(BUSINESS WIRE)--Kilroy Realty Corporation (NYSE: KRC) today reported
financial results for its fourth quarter ended December 31, 2012, with
net income available to common stockholders of $185.8 million, or $2.45
per share, compared to net income available to common stockholders of
$39.9 million, or $0.68 per share, in the fourth quarter of 2011.
Revenues from continuing operations in the fourth quarter totaled $111.1
million, up from $94.2 million in the prior year's fourth quarter. Funds
from operations (FFO) for the period totaled $49.8 million, or $0.63 per
share, compared to $40.5 million, or $0.66 per share, in the
year-earlier period.

For its fiscal year ended December 31, 2012, KRC reported net income
available to common stockholders of $249.8 million, or $3.56 per share,
compared to $50.8 million, or $0.87 per share, in fiscal 2011. Revenues
from continuing operations in 2012 totaled $404.9 million, up from
$337.6 million in 2011. FFO for the year totaled $165.5 million, or
$2.25 per share, compared to $136.2 million, or $2.29 per share, in 2011.

Results for the fourth quarter ended December 31, 2012 include $0.01 per
share of acquisition-related expenses and a $0.01 per share cash payment
related to a 2009 tenant default. Results for the fourth quarter ended
December 31, 2011 include approximately $0.02 per share of
acquisition-related expenses and a $0.06 per share cash payment related
to the above mentioned 2009 tenant default. In addition, results for the
year ended December 31, 2012 include a non-cash charge of approximately
$0.10 per share related to the redemption of all of the Company's Series
E and Series F preferred stock and the Operating Partnership's Series A
preferred units. Additionally, 2012 fourth quarter and full year net
income includes approximately $186.4 million and $259.2 million,
respectively, of net gains from property dispositions. Net income for
the fourth-quarter and year-ended 2011 includes approximately $39.0
million and $51.6 million, respectively, of net gains from property
dispositions. All per share amounts in this report are presented on a
diluted basis.

Topping its record-setting 2011 performance, KRC achieved its best
annual leasing performance in the company's history as a publicly traded
company in 2012. For the year, KRC signed new and renewing leases on
approximately 2.3 million square feet of office space. At December 31,
2012, the company's stabilized portfolio, encompassing approximately
13.2 million square feet of office space located in Los Angeles, Orange
County, San Diego, the San Francisco Bay Area and greater Seattle, was
92.8% occupied.

Throughout 2012, KRC was an active buyer of both stabilized office
properties and development opportunities-most of the latter fully
entitled projects that are predominantly 100% pre-leased. The company
also remained an active seller of fully valued or non-strategic
properties, recycling the proceeds from these dispositions into its
acquisition and development programs.

The company acquired two office properties in the fourth quarter for an
aggregate purchase price of approximately $102.0 million.

In October, the company acquired Tribeca West, a 96.8% occupied, 151,000
square foot, three-story entertainment-oriented office campus located at
12233 W. Olympic Boulevard immediately adjacent to the company's
Westside Media Center in West Los Angeles. The purchase price was
approximately $72.9 million.

In December, as part of a larger development transaction at 555 N.
Mathilda Avenue, the company acquired a 76,000 square foot office
building located in the Sunnyvale submarket of Silicon Valley. It is
100% occupied by LinkedIn Corporation. The purchase price was
approximately $29.1 million.

Also, in the fourth quarter, the company acquired three development
sites for an aggregate land purchase price of approximately $177.0
million. All three development projects are located in high-demand
submarkets of the greater San Francisco Bay Area, are under
construction, and are fully leased.

In October, the company purchased the land site at 350 Mission Street in
San Francisco, where the company plans to build up to a 445,000 square
foot, 30-story LEED-platinum certified office tower for salesforce.com
under an average lease term of approximately 14 years. The purchase
price for the land was approximately $52.0 million.

In December, the company purchased the land site at 331 Fairchild Drive
in Mountain View, California. The company plans to build an 88,000
square foot office building for Audience, Inc. under a 10-year lease
agreement. The purchase price for the land was approximately $18.9
million.

In December, the company purchased the land site at 555 N. Mathilda
Avenue in Sunnyvale, California, where the company plans to build an
approximate 587,000 square foot office campus for LinkedIn under a
12-year lease agreement. The purchase price for the land was
approximately $106.1 million.

Further, during the fourth quarter, KRC completed the sale of its entire
39-property industrial portfolio along with two small office projects,
all located in Southern California, in two transactions that together
generated gross proceeds of approximately $354.2 million.

Across the entire year, KRC completed the purchase of 14 office
buildings in seven transactions aggregating approximately 1.8 million
square feet of space for an aggregate purchase price of approximately
$674.0 million. The company also added six individual projects to its
development pipeline, acquiring the projects for an aggregate land
purchase price of approximately $335.0 million. The company estimates
that its total investment, including land, in these six development
projects will aggregate approximately $1.2 billion. In addition, it sold
46 office and industrial buildings, generating aggregate gross proceeds
of approximately $500.3 million.

Details of all these transactions are available in the News and Investor
Relations sections on the company's website.

"KRC entered 2012 a significantly stronger enterprise-with a bigger
geographic footprint, a deeper talent bench, broader, more
cost-efficient access to capital, and a sharper focus on the West
Coast's most economically vibrant markets,” said John Kilroy, Jr., the
company's president and chief executive officer.

“Throughout the year, we've leveraged those strengths to improve the
quality and diversity of our office portfolio, establish a leading role
in the creation of a new generation of office space, maintain and
capitalize on the market's strong demand for quality real estate assets
to dispose of non-strategic properties at advantageous prices,” said
Kilroy. “The results can be seen in our growing roster of dynamic
tenants, our improving financial results, and our strong total return to
shareholders.”

KRC management will discuss initial earnings guidance for fiscal 2013
during the company's January 31, 2013 earnings conference call. The call
will begin at 10:00 a.m. Pacific Time and last approximately one hour.
Those interested in listening via the Internet can access the conference
call at http://www.kilroyrealty.com.
Please go to the website 15 minutes before the call and register. It may
be necessary to download audio software to hear the conference call.
Those interested in listening via telephone can access the conference
call at 888-679-8018 reservation # 14346152. A replay of the conference
call will be available via phone through February 7, 2013 at
888-286-8010, reservation # 13461889, or via the Internet at the
company's website.

About Kilroy Realty Corporation. Kilroy Realty
Corporation, a member of the S&P Small Cap 600 Index, is a real estate
investment trust active in major West Coast office markets. For over
65 years, the company has owned, developed, acquired and managed real
estate assets primarily in the coastal regions of Los Angeles, Orange
County, San Diego, the San Francisco Bay Area and greater Seattle. At
December 31, 2012, the company owned 13.2 million rentable square feet
of commercial office space. More information is available at http://www.kilroyrealty.com.

Forward-Looking Statements. This press release contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are based
on our current expectations, beliefs and assumptions, and are not
guarantees of future performance. Forward-looking statements are
inherently subject to uncertainties, risks, changes in circumstances,
trends and factors that are difficult to predict, many of which are
outside of our control. Accordingly, actual performance, results and
events may vary materially from those indicated in forward-looking
statements, and you should not rely on forward-looking statements as
predictions of future performance, results or events. Numerous factors
could cause actual future performance, results and events to differ
materially from those indicated in forward-looking statements,
including, among others, risks associated with: investment in real
estate assets, which are illiquid; trends in the real estate industry;
significant competition, which may decrease the occupancy and rental
rates of properties; the ability to successfully complete acquisitions
and dispositions on announced terms; the ability to successfully operate
acquired properties; the availability of cash for distribution and debt
service and exposure of risk of default under debt obligations; adverse
changes to, or implementations of, applicable laws, regulations or
legislation; and the ability to successfully complete development and
redevelopment projects on schedule and within budgeted amounts. These
factors are not exhaustive. For a discussion of additional factors that
could materially adversely affect our business and financial
performance, see the factors included under the caption "Risk Factors"
in our annual report on Form 10-K for the year ended December 31, 2011
and our other filings with the Securities and Exchange Commission. All
forward-looking statements are based on information that was available,
and speak only, as of the date on which they are made. We assume no
obligation to update any forward-looking statement made in this press
release that becomes untrue because of subsequent events, new
information or otherwise, except to the extent required in connection
with ongoing requirements under Federal securities laws.

KILROY REALTY CORPORATION

SUMMARY QUARTERLY RESULTS

(unaudited, in thousands, except per share data)

Three Months

Ended

December 31, 2012

Three Months

Ended

December 31, 2011

Year Ended

December 31, 2012

Year Ended

December 31, 2011

Revenues from continuing operations

$

111,111

$

94,226

$

404,912

$

337,629

Revenues including discontinued operations

$

115,763

$

105,136

$

431,474

$

383,147

Net income available to common stockholders(1)

$

185,839

$

39,907

$

249,826

$

50,819

Weighted average common shares outstanding - basic

74,596

58,440

69,640

56,717

Weighted average common shares outstanding - diluted

75,721

58,440

69,640

56,717

Net income available to common stockholders per share - basic (1)

$

2.49

$

0.68

$

3.56

$

0.87

Net income available to common stockholders per share - diluted (1)

$

2.45

$

0.68

$

3.56

$

0.87

Funds From Operations (1), (2), (3)

$

49,816

$

40,525

$

165,455

$

136,173

Weighted average common shares/units outstanding - basic (4)

77,595

61,108

72,531

59,362

Weighted average common shares/units outstanding - diluted (4)

78,720

61,110

73,654

59,549

Funds From Operations per common share/unit - basic (1), (4)

$

0.64

$

0.66

$

2.28

$

2.29

Funds From Operations per common share/unit - diluted (1), (4)

$

0.63

$

0.66

$

2.25

$

2.29

Common shares outstanding at end of period:

74,927

58,820

Common partnership units outstanding at end of period

1,827

1,718

Total common shares and units outstanding at end of period

76,754

60,538

December 31, 2012

December 31, 2011

Stabilized office portfolio occupancy rates:(5)

Los Angeles and Ventura Counties

94.0

%

83.5

%

San Diego County

90.7

%

92.5

%

Orange County

92.0

%

93.4

%

San Francisco Bay Area

95.5

%

93.3

%

Greater Seattle

93.3

%

89.9

%

Weighted average total

92.8

%

90.1

%

Total square feet of stabilized office properties owned at end of
period:(5)

Los Angeles and Ventura Counties

3,488

2,981

San Diego County

5,250

5,182

Orange County

497

541

San Francisco Bay Area

2,287

1,827

Greater Seattle

1,727

890

Total

13,249

11,421

(1)

Net Income Available to Common Stockholders includes a net gain on
dispositions of discontinued operations of $186.4 million and $259.2
million for the three months and year ended December 31, 2012,
respectively. Net Income Available to Common Stockholders includes a
net gain on dispositions of discontinued operations of $39.0 million
and $51.6 million for the three months and year ended December 31,
2011, respectively.

(2)

Reconciliation of Net Income Available to Common Stockholders to
Funds From Operations and management statement on Funds From
Operations are included after the Consolidated Statements of
Operations.

(3)

Reported amounts are attributable to common stockholders and common
unitholders.

(4)

Calculated based on weighted average shares outstanding including
participating share-based awards and assuming the exchange of all
common limited partnership units outstanding.

(5)

Occupancy percentages and total square feet reported are based on
the Company's stabilized office portfolio for the period presented.
Occupancy percentages and total square feet shown for December 31,
2011 include the office properties that were sold during the fourth
quarter of 2012.

KILROY REALTY CORPORATION CONSOLIDATED
BALANCE SHEETS

(unaudited, in thousands)

December 31, 2012

December 31, 2011

ASSETS

REAL ESTATE ASSETS:

Land and improvements

$

612,714

$

537,574

Buildings and improvements

3,335,026

2,830,310

Undeveloped land and construction in progress

809,654

430,806

Total real estate held for investment

4,757,394

3,798,690

Accumulated depreciation and amortization

(756,515

)

(742,503

)

Total real estate held for investment, net

4,000,879

3,056,187

Real estate assets and other assets held for sale, net

—

84,156

Cash and cash equivalents

16,700

4,777

Restricted cash

247,544

358

Marketable securities

7,435

5,691

Current receivables, net

9,220

8,395

Deferred rent receivables, net

115,418

101,142

Deferred leasing costs and acquisition-related intangible assets, net

189,968

155,522

Deferred financing costs, net

18,971

18,368

Prepaid expenses and other assets, net

9,949

12,199

TOTAL ASSETS

$

4,616,084

$

3,446,795

LIABILITIES, NONCONTROLLING INTEREST AND
EQUITY

LIABILITIES:

Secured debt

$

561,096

$

351,825

Exchangeable senior notes, net

163,944

306,892

Unsecured debt, net

1,130,895

980,569

Unsecured line of credit

185,000

182,000

Accounts payable, accrued expenses and other liabilities

154,734

81,713

Accrued distributions

28,924

22,692

Deferred revenue and acquisition-related intangible liabilities, net

117,904

79,781

Rents received in advance and tenant security deposits

37,654

26,917

Liabilities and deferred revenue of real estate assets held for sale

—

13,286

Total liabilities

2,380,151

2,045,675

NONCONTROLLING INTEREST:

7.45% Series A Cumulative Redeemable Preferred units of the
Operating Partnership

—

73,638

EQUITY:

Stockholders' Equity

7.80% Series E Cumulative Redeemable Preferred stock

—

38,425

7.50% Series F Cumulative Redeemable Preferred stock

—

83,157

6.875% Series G Cumulative Redeemable Preferred stock

96,155

—

6.375% Series H Cumulative Redeemable Preferred stock

96,256

—

Common stock

749

588

Additional paid-in capital

2,126,005

1,448,997

Distributions in excess of earnings

(129,535

)

(277,450

)

Total stockholders' equity

2,189,630

1,293,717

Noncontrolling Interest

Common units of the Operating Partnership

46,303

33,765

Total equity

2,235,933

1,327,482

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY

$

4,616,084

$

3,446,795

KILROY REALTY CORPORATION CONSOLIDATED
STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

Three MonthsEndedDecember 31, 2012

Three MonthsEndedDecember 31, 2011

Year EndedDecember 31, 2012

Year EndedDecember 31, 2011

REVENUES:

Rental income

$

101,288

$

83,265

$

369,516

$

307,118

Tenant reimbursements

8,362

6,563

32,309

23,977

Other property income

1,461

4,398

3,087

6,534

Total revenues

111,111

94,226

404,912

337,629

EXPENSES:

Property expenses

21,451

17,729

79,357

66,821

Real estate taxes

9,341

7,691

34,479

29,633

Provision for bad debts

151

516

153

781

Ground leases

892

513

3,168

1,779

General and administrative expenses

9,443

7,793

36,188

28,148

Acquisition-related expenses

1,040

1,224

4,937

4,053

Depreciation and amortization

46,085

35,960

162,917

124,928

Total expenses

88,403

71,426

321,199

256,143

OTHER (EXPENSES) INCOME:

Interest income and other net investment gains

145

299

848

571

Interest expense

(18,942

)

(23,115

)

(79,114

)

(85,785

)

Total other (expenses) income

(18,797

)

(22,816

)

(78,266

)

(85,214

)

INCOME (LOSS) FROM CONTINUING OPERATIONS

3,911

(16

)

5,447

(3,728

)

DISCONTINUED OPERATIONS:

Income from discontinued operations

3,285

5,844

12,409

19,630

Net gain on dispositions of discontinued operations

186,435

39,032

259,245

51,587

Total income from discontinued operations

189,720

44,876

271,654

71,217

NET INCOME

193,631

44,860

277,101

67,489

Net income attributable to noncontrolling common units of the
Operating Partnership

Original issuance costs of redeemed preferred stock and preferred
units

—

—

(6,980

)

—

Total preferred distributions and dividends

(3,313

)

(3,799

)

(21,088

)

(15,196

)

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

$

185,839

$

39,907

$

249,826

$

50,819

Weighted average common shares outstanding - basic

74,596

58,440

69,640

56,717

Weighted average common shares outstanding - diluted

75,721

58,440

69,640

56,717

Net income available to common stockholders per share - basic

$

2.49

$

0.68

$

3.56

$

0.87

Net income available to common stockholders per share - diluted

$

2.45

$

0.68

$

3.56

$

0.87

KILROY REALTY CORPORATION FUNDS FROM
OPERATIONS

(unaudited, in thousands, except per share data)

Three MonthsEndedDecember 31, 2012

Three MonthsEndedDecember 31, 2011

Year EndedDecember 31, 2012

Year EndedDecember 31, 2011

Net income available to common stockholders

$

185,839

$

39,907

$

249,826

$

50,819

Adjustments:

Net income attributable to noncontrolling common units of the
Operating Partnership

4,479

1,154

6,187

1,474

Depreciation and amortization of real estate assets

45,933

38,496

168,687

135,467

Net gain on dispositions of discontinued operations

(186,435

)

(39,032

)

(259,245

)

(51,587

)

Funds From Operations (1)

$

49,816

$

40,525

$

165,455

$

136,173

Weighted average common shares/units outstanding - basic

77,595

61,108

72,531

59,362

Weighted average common shares/units outstanding - diluted

78,720

61,110

73,654

59,549

Funds From Operations per common share/unit - basic (2)

$

0.64

$

0.66

$

2.28

$

2.29

Funds From Operations per common share/unit - diluted (2)

$

0.63

$

0.66

$

2.25

$

2.29

(1)

The company calculates FFO in accordance with the White Paper on FFO
approved by the Board of Governors of NAREIT. The White Paper
defines FFO as net income or loss calculated in accordance with
GAAP, excluding extraordinary items, as defined by GAAP, gains and
losses from sales of depreciable real estate and impairment
write-downs associated with depreciable real estate, plus real
estate-related depreciation and amortization (excluding amortization
of deferred financing costs and depreciation of non-real estate
assets), and after adjustment for unconsolidated partnerships and
joint ventures.

Management believes that FFO is a useful supplemental measure of the
company's operating performance. The exclusion from FFO of gains and
losses from the sale of operating real estate assets allows
investors and analysts to readily identify the operating results of
the assets that form the core of the company's activity and assists
in comparing those operating results between periods. Also, because
FFO is generally recognized as the industry standard for reporting
the operations of REITs, it facilitates comparisons of the company's
operating performance to other REITs. However, other REITs may use
different methodologies to calculate FFO, and accordingly, the
company's FFO may not be comparable to all other REITs.

Implicit in historical cost accounting for real estate assets in
accordance with GAAP is the assumption that the value of real estate
assets diminishes predictably over time. Since real estate values
have historically risen or fallen with market conditions, many
industry investors and analysts have considered presentations of
operating results for real estate companies using historical cost
accounting alone to be insufficient. Because FFO excludes
depreciation and amortization of real estate assets, management
believes that FFO along with the required GAAP presentations
provides a more complete measurement of the company's performance
relative to its competitors and a more appropriate basis on which to
make decisions involving operating, financing and investing
activities than the required GAAP presentations alone would provide.

However, FFO should not be viewed as an alternative measure of the
company's operating performance since it does not reflect either
depreciation and amortization costs or the level of capital
expenditures and leasing costs necessary to maintain the operating
performance of the company's properties, which are significant
economic costs and could materially impact the company's results
from operations.

(2)

Reported amounts are attributable to common stockholders and common
unitholders.